Price tends towards the level which equates supply with demand’. Explain this statement.
Explanation
(i) Price of goods is determined by the interaction of the forces of demand and supply.
(ii) If the price is at a level where supply is less than demand, then there will be excess demand which may increase the price. For example, at price OP\(_1\), OQ\(_2\) was supplied while OQ\(_3\) was demanded.
(iii) If the price is at a level where supply is greater than demand (above equilibrium), there would be excess supply, leading to a fall in price. For example, at price OP\(_2\), OQ\(_4\) was supplied while OQ\(_1\) was demanded.
(iv) The equilibrium price is OP\(_0\) where demand is equal to supply. There is no tendency for price to change. The quantity supplied is equal to quantity demanded at OQ\(_0\)